On 5 December 2014 the Council of the EU published amendments to its Ukraine sanctions regime in Regulation 1290/2014 (the “Regulation”). Since March 2014 the EU has imposed a series of restrictive measures against Russia in relation to the ongoing crisis in Ukraine, in respect of actions undermining or threatening the country’s sovereignty and territorial integrity.
The Regulation does not impose any new measures but instead seeks to clarify the scope of the existing regime, which created various prohibitions in the areas of energy, defence, capital markets and financial services, and dual-use goods and sensitive technologies. We set out the key aspects of the Regulation below.
Oil exploration and production
The sanctions regime requires that the sale, supply, transfer or export of items listed in an Annex to the Regulation, which are destined for certain types of oil exploration and production projects in Russia, be subject to prior authorisation by the competent authorities of the exporting Member State. Certain associated services are also prohibited. Some of the terminology used in this prohibition was previously undefined, but the Regulation has introduced descriptions for the terms ‘Arctic’, ‘shale projects’ and ‘deep water’. For example, deep water exploration means “any operation extracting oil carried out deeper than 150 meters below the surface”. These descriptions should lead to consistent interpretation and guidance across Member States, providing greater certainty for companies looking to establish whether their project is caught by the prohibition.
By way of a re-stated carve-out to the prohibition, the Regulation has also clarified the circumstances in which a competent authority may provide an authorisation. An authorisation will be permitted where “necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment.” The Regulation also provides that, in duly justified cases of emergency, the sale, supply, transfer or export may proceed without prior authorisation, provided the exporter notifies the competent authority within five working days of this taking place.
Capital Markets and Financial Services
The July 2014 sanctions prohibited five major Russian financial institutions from dealing with bonds, equity or similar financial instruments with a maturity exceeding 90 days, if issued after 1 August 2014. In September 2014, the prohibition was extended to three Russian defence companies and three Russian energy companies, and was extended to instruments with a maturity exceeding 30 days. It is also prohibited directly or indirectly to make loans or credit available to any of the entities covered by the measures. Three carve-outs to this prohibition have now been clarified and partially extended.
The prohibition on making new loans or credit available will not apply where:
- there is a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services. This carve-out has been extended so that it applies not only to trade between the Union and Russia but also to trade between the Union and any third State.
- there is a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for subsidiaries of the companies covered by the prohibition. This means that the Russian banks subject to the prohibition on raising funds are allowed to access financing where a subsidiary is in need of emergency funding, provided the subsidiary is registered in the EU and more than 50% of its shares are owned by one of the listed banks.
The carve-out for drawdowns or disbursements made under a contract concluded before 12 September 2014 has also been clarified. In order to benefit from the carve-out, two conditions must be met:
- all the terms and conditions of the drawdown/disbursement were agreed before 12 September 2014 and have not since been modified; and
- the maturity date was fixed (before 12 September 2014) for the repayment in full of all funds made available and for the cancellation of all the commitments, rights and obligations under the contract.
The Regulation has introduced a global change to the ‘grandfathering’ carve-outs which already applied to any contract concluded before the sanctions came into force. The carve-outs now also apply to “ancillary contracts necessary for the execution of such a contract”.
All references to Russia have been amended to include “its Exclusive Economic Zone and Continental Shelf”.
What do the amendments mean?
The Regulation was adopted because the Council considered it necessary to clarify certain provisions of the existing sanctions regime. The amendments focus in particular on the measures relating to financial institutions and the energy sector, which stand to be the most significantly impacted by the sanctions. The clarifications should assist in ensuring the consistent interpretation and application of the measures across Member States. (The UK legislation will soon be amended to reflect the Regulation.) This in turn should reduce the risk for the EU of further challenges being brought by companies affected by the sanctions regime. Energy company Rosneft brought an application in the General Court of the EU in October 2014 seeking the annulment of various measures imposed in July 2014. Three Russian financial institutions, Sberbank, VTB and Vnesheconombank, have also filed similar actions.
What you should do
Companies should carry out enhanced due diligence to ensure that they do not become involved in loan or credit arrangements with a maturity exceeding 30 days with the named Russian banks and energy and defence companies - and any non-EU subsidiaries in which those entities hold a majority shareholding. Care must also be taken to ensure that any exports of goods or services to Russia do not place companies in breach of the sanctions rules. In particular, energy companies must ensure that their contracts for services do not infringe the ban in relation to oil exploration and production projects.
The Regulation is available here.